Lower Rates for Longer Changes Game for mREITs: Wunderlich

By Randall Forsyth

The likelihood interest rates will remain low for an extended period is a “gamechanger” for mortgage real estate investment trusts, writes Wunderlich Securities analyst Merrill Ross. Even so, dividends may come under pressure for some mREITs and selectivity is needed in the group, she adds.

Rising interest rates are the main risk faced by mREITs, which essentially run leveraged portfolios of mortgage securities; that can boost the cost of their borrowings and thus reduce earnings. Rapid falls in mortgage rates also can have a negative impact as homeowners take advantage to refinance. That results in a rise in prepayments, which in turn have to reinvested at lower rates. Juggling these factors is at the core of managing mREITs, which which they’ve historically done with varying degrees of success.

The odds of a Federal Reserve rate hike are virtually nil out to 2018, eliminating that risk to mREITs. Prepayments are apt to remain elevated, she writes, and regions that have seen home-price appreciation may see higher speeds, as that boosts homeowners’ equity, which is needed to refi. Still, the effect of lower mortgage-backed securities yields and the effect of interest-rate swaps to hedge the portfolios could pressure second-quarter earnings.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.